What is the background?
Information about the directors of a company is widely available to members of the public and, of course, HMRC. A quick search at Companies House will reveal the names of the statutory directors. If HMRC undertake an Employer Compliance Review they will look very closely at the Directors’ tax and National insurance (NI) position.
Typically, if they identify any mistakes HMRC will pursue the employer for the liability. However, if they identify a discrepancy in respect of the treatment to directors’ pay, benefits and expenses they could pursue the directors.
What is the issue?
There are lots of potential pitfalls for employers. Some of the current hot topics and danger areas include:
- Directors’ fees not subjected to PAYE
This is potentially a very complex area. HMRC regard a director as an office holder. Any payments made to a director for office holder duties are liable to PAYE, tax and NI (subject to a few specific exceptions).
- Payments to Non Executive Directors (NEDs)
HMRC also regard a NED as an office holder and any payments to them for their director duties should be subjected to PAYE.
- Directors’ fees paid via Personal Service Companies (PSCs)
It is unusual for a business to engage a company as a director. Payments to directors and NEDs via PSCs should also be subjected to PAYE, tax and NI by the employer (rather than the PSC).
- Directors who also provide consultancy services
Some NEDs provide consultancy services as well as performing director duties. HMRC usually accept that PAYE is only due in respect of the director duties, and it is typical for there to be two contracts to cover both engagements. However, HMRC will usually challenge such arrangements for executive directors working full time in a business.
- Expenses
HMRC will look carefully at directors’ expenses to ensure none are taxable and liable to NI. For example, a director may use their credit card to purchase gifts for employees or meet staff entertaining costs. Those costs may be taxable and would typically appear on a PAYE Settlement Agreement calculation.
- Directors’ Loan Accounts
HMRC may undertake a review of the account to check whether any taxable benefit has been calculated correctly and to see if there are any elements that should be regarded as remuneration on which PAYE tax and NI should have been paid.
In addition, employers who charge interest on overdrawn accounts, based on the official rate of interest published by HMRC (usually set at the start of a tax year), should be aware that from April 2025 a change is intended. From April 2025, those interest rates will be reviewed each quarter, and may change, rather than be unchanged throughout the whole of the tax year. The result could be either an unexpected taxable benefit and additional tax and NIC liabilities or excess interest being paid by the director.
- NED Expenses
If a NED is attending all board meetings at the same location (or nearly always the same location) HMRC will regard the costs of travel to that place and any accommodation and subsistence associated with the travel as taxable and liable to NI.
- Directors’ NI
Special directors’ NI rules must be considered and applied. These deal with fluctuating payments (for example, bonuses) by using an annual cumulative calculation. The rules are complex and errors are often made.
- NI deferments
In some circumstances, it is possible for a director who has more than one employment to apply for a deferment of NI. They may then pay a lower rate of NI at one or more employers to ensure they do not pay over the maximum for the year. Employers must only deduct the lower rate if they hold the appropriate paperwork from HMRC.
- Non-resident directors
Very complex rules apply in respect of non-resident directors and their expenses. It is possible for a liability to UK tax and NI to arise, even where the director is not paid by the UK entity.
If a mistake is made, the employer liability, which includes interest and potential penalties of up to 100%, is often substantial as HMRC may extrapolate the liability back for the previous six tax years.
In addition, it is possible for HMRC to open up a subsequent enquiry into a director’s own personal tax affairs, especially where there may be additional tax to pay.
What do employers need to consider?
Employers need to:
- Understand which directors are registered at Companies House;
- Check how each element of their pay, benefits and expenses has been dealt with for tax and NI;
- Consider if they need to approach HMRC to disclose any errors; and
- Ensure they are able to explain to HMRC why they have adopted a particular approach towards pay and benefits.
How can UNW help?
Employers need to ensure they are dealing with their directors correctly. Our employment tax specialists have expertise in the tax and NI treatment of directors and negotiations with HMRC. They regularly undertake reviews for clients to ensure they are compliant and are not facing an unexpected liability.
Our reviews typically proceed as follows:
- On-site meeting;
- Identification of all directors, both current and former directors (up to six years);
- Establishing the pay, benefits and expenses package for each;
- Clarification of points and quantification of potential liabilities;
- Feedback report; and
- Disclosure to HMRC if necessary.
If you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk
